Levi's DTC Dominance and Margin Expansion Signal Undervalued Growth Opportunity

The denim giant's second-quarter 2025 results marked a pivotal moment for Levi Strauss & Co. (LEVI), as the company not only beat earnings estimates but also demonstrated the power of its DTC-first strategy and operational discipline to drive margin expansion. With DTC sales now representing 50% of total revenue, gross margins hitting a record 62.6%, and adjusted EPS guidance raised by $0.05, LEVI is positioning itself for sustainable outperformance. Here's why this shift makes the stock a compelling buy at current levels.

The DTC Revolution: Levi's Direct-to-Consumer Dominance

Levi's transition to a DTC-centric model is the linchpin of its growth. Direct sales grew 11% year-over-year, with e-commerce surging 13%, reflecting strong demand for its premium denim and lifestyle brands. The DTC segment now accounts for half of total revenue, up from 47% in 2024, signaling a structural shift away from reliance on wholesale partners. This is critical because DTC transactions carry higher margins and provide direct customer insights, enabling Levi's to refine its product offerings and loyalty programs.

Regionally, the Americas and Europe are leading the charge:
- Americas: DTC sales rose 9%, driven by U.S. demand and store expansions.
- Europe: DTC grew 9%, with e-commerce gains outpacing regional rivals.

The Beyond Yoga brand also contributed, with sales up 12%, though its operating loss highlights the risks of new ventures. Still, Levi's focus on brand equity—bolstered by its iconic status in denim—gives it pricing power. Investors should note that DTC's scalability is a long-term growth lever, especially as millennials and Gen Z increasingly favor direct brand engagement.

Margin Expansion: A Structural Tailwind

Levi's operating margin jumped to 7.5% in Q2, up from 1.5% in 2024, while adjusted EBIT margins expanded 190 basis points to 8.3%. This improvement stems from two key factors:
1. Lower product costs: Supply chain efficiencies and cost mitigation strategies (e.g., diversifying production to offset tariffs) reduced input expenses.
2. Channel mix: Higher-margin DTC sales now dominate, while wholesale growth slowed to 7% organically, reflecting deliberate prioritization of profitability over volume.

The gross margin increase of 140 basis points to 62.6% is particularly impressive. Even with tariffs (30% on Chinese imports, 10% elsewhere), Levi's absorbed costs through pricing and product innovation, avoiding steep consumer price hikes. This margin resilience suggests the company can weather trade headwinds better than peers.

Raised Guidance and Dividend Resilience

Levi's raised its full-year outlook, reflecting confidence in its strategy:
- Revenue guidance: Revised to 1-2% growth (reported), up from a prior expectation of a 1-2% decline, with organic growth now forecast at 4.5-5.5%.
- EPS guidance: Increased to $1.25-$1.30, up from $1.20-$1.25, driven by margin expansion and demand resilience.

The dividend yield, now at 0.7% (after a 7.7% hike to $0.14/share), may seem modest, but it signals financial stability. With $654 million in cash and plans to deploy $100 million from the Dockers sale into share buybacks, Levi's is balancing growth investments with shareholder returns—a disciplined approach.

Risks and Mitigation Strategies

Levi's faces challenges, notably:
- Tariffs: U.S. levies on Chinese imports and global geopolitical tensions could strain margins further.
- Asia underperformance: Flat sales in Asia (excluding DTC growth) highlight execution risks in emerging markets.

However, management has mitigated these risks:
- Cost controls: Restructuring charges ($7 million in Q2) and Project Fuel initiatives are trimming SG&A costs.
- Geographic diversification: Europe's 15% organic growth and the Americas' stability offset Asia's stagnation.

Valuation: Undervalued Amid Growth Catalysts

At a P/E of 15.2x (based on $1.28 EPS midpoint guidance), LEVI trades at a discount to peers like PVH Corp. (PVH, P/E 22x) and Tapestry (TPR, P/E 18x). This undervaluation persists despite Levi's strong brand equity and margin tailwinds. Key catalysts include:
- DTC expansion: Targeting 55%+ DTC sales by 2026 could boost margins further.
- Global brand relevance: Levi's denim remains a cultural staple, with sustainability initiatives (e.g., recycled materials) appealing to ESG-focused investors.

Investment Thesis: Buy LEVI for Sustainable Outperformance

Levi's DTC-first model, margin resilience, and strategic capital allocation make it a standout in an apparel sector still grappling with inflation and supply chain volatility. While Asia's challenges and tariffs pose near-term risks, the company's focus on premium pricing, brand strength, and operational discipline positions it to outperform over the long term.

Historical data further supports this outlook: over the past three years, LEVI's stock has averaged a 2.33% return following quarters where it exceeded earnings expectations, with a maximum gain of 4.41% in January 2023. This underscores the stock's potential to capitalize on positive earnings catalysts, such as the recent margin and DTC growth milestones.

Recommendation: LEVI is a buy at current levels ($21.30 as of July 7, 2025). Investors should target entry points below $20, with a price target of $26 based on a 18x P/E multiple (factoring in margin expansion and EPS growth). Hold for 1-3 years to capture the full benefits of its strategic shift.

Final Take: Levi's isn't just selling jeans—it's building a direct-to-consumer empire with margin discipline and brand equity that few rivals can match. This is a stock to own for sustainable growth.